Latin American Real Estate Prepares for COVID-19 Impact
As the Coronavirus (COVID-19) pandemic continues to expand throughout the Latin American borders, the real estate sector awaits cautiously and with two main questions: just how long will this last and how will it impact each sector?
Over 120 directors, presidents and C-level executives went online and participated in two GRI eMeetings on March 25. Representatives from the hospitality, retail, housing, mixed-use, industrial and financing sectors from all over Latin America discussed their main worries and experiences of how COVID-19 is impacting each local economy.
On one hand, Latin American participants agreed that the sectors most affected by the pandemic will be hospitality and shopping centers, while the quickest to recover from this will be the industrial and multifamily sectors. Nevertheless, each country is in a different stage of contingency and responding in their own way. One thing is for sure, the industry is changing and it will evolve as a response to this pandemic. COVID-19 will open the door to new technology and change the paradigms of the real estate industry. The challenges will be keeping up with the changes and adapting to the new flow.
Main Real Estate Player’s Worries from COVID-19 ImpactMost participants agreed that it was too early to see the true impact of COVID-19 on local economies, and that there are still many question marks. In April we will see the real effects of the pandemic, and a much heavier impact on retail and hospitality. They also pointed out that it is important to look at countries that are more advanced in the pandemic and learn from what they have done or not done.
Chile for instance is officially on lockdown and although the curfew is parcial, it will impact the country’s supply chain. Most of the people that work on construction sites live on the outskirts of town, endangering their health to come into the city to work. Housing projects are on hold and the stores we own are closing. Nobody is going to malls or their offices. A Chilean member shared that COVID-19 has hit all sectors hard. Malls are closed, leaving only true necessities and that this will last more than a year, probably two. Most developers in Chile are also quite traditional and although we all knew home office was coming, they were not prepared for this fast-track. Chile has also experienced a social outcry since last october, freezing various sectors and operations.
How will Latin American countries be able to overcome this situation? Some worried that the government needs to play a stronger role in ensuring the health of both its citizens and the economy and that this is tied to cultural values in each country. For instance, china has a strong respect for authorities and the government, while some Latin American countries do not. The government's decisions and measures it implements will play a crucial role in reactivating the economy.
When the pandemic is controlled, how long would it take the economy to kickstart again? Most participants agreed that it would take 3-12 months for the economy to recover. A mexican player said that it would take this much because investor trust is very damaged and consumption has taken a big dip. When things pass, we may be ready to go back to business, but what about the demand? How will the economy be performing? The best bet is to hold on to cash for a bit. Some were more positive, and believe that everybody wants the economy to recover the moment there is positive news from the government or when there is a medical solution.
Latin American Real Estate Sector Responds to COVID-19
Projects that were under construction are on hold in most countries and it may be impacted in the short term. Housing is a necessity and acts as a refuge for people. Participants agreed that there may be a change in not only the demand for housing following the pandemic, but that it may evolve to fit new needs generated by this experience. The sector may see the comeback of some values and changes in the rules of the game. A player in the multifamily for rent said that it is important to watch what measures each country will take, particularly when it comes to subsidies. There will not be a great drop in the market, but we will see changes in densities, spaces and new products.
When it comes to multifamily for sale, a Mexican player believes the sector will be impacted but they are more bullish. History tells us that people go back to bricks because they are a more secure investment. But it is important to see where the new trends will move the market and its the moment to look for opportunities, but with caution.
Industrial and Logistics
With the demand for e-commerce and home delivery, industrial and logistics real estate sectors could be the quickest to recover, but there are some factors that could slow down its recuperation. An industrial leader from the Peruvian market asked participants to take into consideration what companies are occupying their industrial spaces, as not all of them are e-commerce. There are many industrial companies that will suffer through this crisis, among them car manufacturers with limited mobility and there will be various companies that will not be able to survive this. The industrial sector will need to convert these industrial facilities, which is no easy task as many of them are built-to-suit. There will be many industrial spaces that will not be able to restore these spaces and the locations may not fit the demands of new users.
Another player pointed out that if economies enter an economic recession, e-commerces will also go down. The repercussions of COVID-19 will be felt everywhere and the industry must remain objective to see the consequences. A player from Panama added that overall the country will see a considerable increase in ecommerce, but it also agrees it will take time to recuperate from a recession. Nevertheless demand from the agroindustry, technological and pharmaceutical sectors will stay busy.
Shopping Centers and Retail
In general, COVID-19 has been accelerating eCommerce throughout Latin America. Real estate leaders agree that many smaller-medium size retailers have had to advance their plans to offer online. The real estate sector will have to also play catch up and various countries that did not have a mature e-commerce market will adjust.
This switch will require the professionalization of logistic spaces and new spaces, such as last mile distribution centers.
To understand more or so the impact on the retail sector, it is key to look at the Chinese market. A participant shared that shopping centers in Wuhan had a 48 percent drop in comparison to 2019, meaning the slope is steep. It is slowly recovering, but it is still not clear when it will recover. The main worry associated with shopping centers are tenant risks as they start to close in Latin America. A player from Uruguay shared that the regulation is that they can charge 60 percent of the rent and that the rest will be deferred to the 2H20.
While a player from Colombia says that the percentage is still being debated and it is unclear how latin markets will be able to overcome this. The colombian government has implemented quarantine and believes that each real estate owner should renegotiate with its tenants instead of the government stating what needs to be done. Overall, regardless of the country, retail revenue will decrease and there will be some that have no revenue at all. Landlords and tenants will have to adapt and find a way to survive together.
With Latin America’s most popular travel seasons around the corner, the impact of COVID-19 on hospitality is being felt immediately. From airlines to resorts, the entire chain is suffering, a participant believes that it will take the hardest blow and it will take the longest to recover. An international hotel chain shared with participants its experience not only in Latin America, but in China. When El Salvador closed its borders, hotels were functioning at a minimum occupation level only because of the travelers that were stuck in the country. As soon as these guests are able to leave the country, the chain is evaluating closing the hotels completely.
In China our hotels are taking off again, after closing 150 during the lockdown, now the chain has only 50 closed. Occupation rates are still low and it lasted approximately 1.5 months, but it is important to understand how drastic China’s measures were. The main fears hospitality leaders have is that Latin America is too relaxed and that it will take much longer to reopen the hotels. Mexico for instance has not enforced strong safety measures. After the spread is contained in the region, occupation could recover, but the main problem would be tariff war that would unleash among hotels.
Latin America has been a slower adopter of the home office, but COVID-19 has pushed companies to quickly adapt and send its employees home. This has spurred a change in the office sector and members believe we will see a drastic change in the next year. In the long term, more buildings will have to adapt larger spaces for coworking spaces. A financial leader believes the office sector will be hit in the next months in Mexico, especially given its vast inventory that has yet to be absorbed. Although Mexico had not yet enforced any stay at home measures, around 85 percent of office users have already been doing home office.
Join the dicussion! See the next LatAm eMeetings here.